As contractor, subcontractor or consultant, the nightmare scenario of your client/main contractor entering insolvency might be unavoidable and in a post Covid-19 world the risk is likely to be even higher. This might happen despite thorough pre-contract checks and risk protection measures. It’s important to remember that the type of insolvency will influence the likely outcome: Whilst the purpose of administration is to rescue the business or achieve a better realisation of assets, the purpose of liquidation is to realise assets for creditors. This article identifies six things to consider.
Right to suspend
There is a statutory right to suspend for non-payment in section 112 of the Construction Act. The right arises if the payer has not paid the sums due by the final date for payment. To exercise this right you must give notice to the payee of your intention to suspend. There is often an express right to suspend on this basis included in the contract.
As a result of Covid-19 some projects are currently suspended and some construction contracts make express provision for works to be suspended for various reasons including force majeure, instructions and exercise of statutory powers. For example, Clause 8.11.1 of the JCT Design & Build 2016 means that if the suspension continues for the period in the Contract Particulars (usually 2 months) then either party can give 7 days’ notice to terminate that contract.
Right to terminate
You should always consider whether termination is the best option in all the circumstances. Consider what form of insolvency is being entered into.
Ideally, before any decision is made there should some dialogue between you, the insolvency professional and other interested parties (i.e. contractor, employer or funder as the case may be).
At common law insolvency is not by itself a breach of contract entitling a party to terminate. Therefore the contract will usually include the right to terminate in the event of insolvency. Such a right exists in the standard JCT Design and Build 2016. This sets out a process to follow which is summarised below:
If you have provided collateral warranties in relation to the works there may be a number of additional considerations.
These may include step in rights by an employer (if the contractor has gone bust) and funder or purchaser (if the employer has gone bust). The rights may be inconsistent with your rights under the contract (i.e. to terminate). They might also include additional requirements to be complied with. It is important to avoid being in breach of the requirements in the warranty and thus liable to the beneficiary for its losses. For instance, the step in provisions may require the contractor to continue working during the period of notice to be given to the party with step in rights.
If step in rights are included check what provision (if any) has been made in relation to any outstanding payments. Such payments may need to be paid by the party exercising the right to step in.
Check whether any form of payment protection was agreed in the contract with the insolvent party. Also check the exact terms of that protection. Examples of this include payment guarantees and retention bonds.
If you supplied goods/materials check whether your contract included a retention of title clause. Have those goods/materials have been paid for and/or incorporated into the works. Our article considering retention of title in more detail is here.
Check the terms of the contracts with your supply chain including for:
Termination may not be the best option and there may be an appetite to complete the project, either through exercise of step in rights or by the insolvency practitioners. You should also be aware that administrators are only an agent of the insolvent company and are not personally liable for the insolvent companies’ obligations. The exception to this is if they confirm that any further work will be payable as an expense of the administration.
If you are entering into a new deal, you may want to consider what terms you would like to include. You may require additional financial protection such as payment guarantees, advance payment and payment on delivery of goods. This will hinge on what bargaining power (if any) you have.
This depends whether the other party is in liquidation or administration. If administration, then consent of administrator or permission of the court is required. If liquidation, then adjudication is not normally available.
Any decisions that may need to be taken in this scenario are not straightforward and depend on the particular circumstances and terms of the contract and any collateral contracts. Moreover you may need to ascertain your position very quickly. If you need any further and specific advice please contact us.